U.S. manufacturer ITT Corp plans to split itself into three companies to take advantage of growing water and industrial markets as its defense unit braces for U.S. military spending cuts.
ITT shares rose as much as 18 percent on Wednesday, reaching their highest point since the fall of 2008.
We are theoretically at the beginning of a recovery in the commercial and industrial end markets, so the timing is good on that front, said Robinson Humphrey analyst Peter Skibitski.
After the breakup, ITT Corp will continue as an aerospace, transportation, energy and industrial engineering company. Another company will make water pumps, and the third will supply defense equipment.
Last month, ITT said the businesses that supply water pumps and products for transportation markets would drive earnings in 2011. It said revenue and operating income would rise in those two segments, but fall in defense, the company's largest unit.
Skibitski said uncertainty about ITT's defense business because of expected U.S. budget cuts held back the share performance. With the share rise on Wednesday, ITT's value is about $11.2 billion.
U.S. Defense Secretary Robert Gates last week said he plans to cut $78 billion from the nation's military budget over the next five years because of the government's growing budget deficit.
Sales in 2009 were about $3.4 billion for the water business and $1.3 billion for the motion and flow segment. The defense unit accounted for more than half of 2009 company sales with revenue of $6.3 billion.
Shareholders will own stock in all three companies, which likely will be traded on the New York Stock Exchange.
Chief Financial Officer Denise Ramos will be CEO of the new ITT, which will supply airplane parts and products for energy and other commercial markets.
David Melcher, head of the defense unit, will lead the new defense company. Gretchen McClain, president of the fluid and motion businesses, will be CEO of the water business.
BREAKING UP IS EASY TO DO
The White Plains, New York-based company was created as International Telephone & Telegraph in 1920 and is in its current form after a three-way split in 1995.
At one time, it owned a variety of companies, from Sheraton Hotels to Continental Baking, the maker of Wonder Bread. From 1960 to 1977, it made 350 acquisitions.
It joins a list of U.S. conglomerates that have streamlined in recent years.
(Read Breakingviews columnist Robert Cyran's commentary on ITT and the conglomerate breakup wave.
Spirits company Fortune Brands , said last month it would spin off or sell its golf unit and spin off its home products unit. Motorola Inc split into two technology companies that began formal trading this year.
General Electric Co this month expects to close its sale of a majority stake in NBC Universal media to Comcast Corp , marking its exit from a business that investors long said fit poorly among its industrial franchises.
Some analysts said the ITT defense and water businesses could attract takeover interest in light of the breakup plan.
Pro forma 2011 revenue for the future ITT Corp is estimated at $2.1 billion, the company said.
ITT expects to finish the breakup by the end of the year. Lazard and JPMorgan Chase advised the company on the break-up plan.
ITT shares, which gained 10 percent of their value in the last three months, were up more than 14 percent, or $7.67, to $60.45 on the New York Stock Exchange.
(Reporting by Karen Jacobs in Atlanta, Nick Zieminski and Soyoung Kim in New York, Scott Malone in Boston and Bijoy Koyitty in Bangalore. Editing by Sriraj Kalluvila and Robert MacMillan)